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{{ | {{a|netting|{{image|Netting Eagle|png|''Legal Eagle Laid Low by Netting Opinions'' {{vsr|1986}}}}}}The Good Lord bless the [[netting opinion]], for no-one else, who yet has spring left in its mortal coil, will. | ||
It is, but is not ''just'', a [[legal opinion]] — at the best of times a dreary, charmless and pointless affair — but one addressing one of the most soul-obliterating questions a grown adult could pose: whether an insolvency administrator of an insolvent [[counterparty type|counterparty of a certain type]], in a certain jurisdiction, would be obliged to respect the [[close-out netting]] provisions under your [[master trading agreement]] should that [[counterparty]] go bust. | |||
Because God — manifesting {{sex|Herself}} this time in the guise of the [[Basel Committee on Banking Regulations and Supervisory Practices]] — has played a cruel cosmic joke on all [[inhouse lawyer]]s. By ''diktat'' of the latest [[Basel Accords|Basel Accord]]<ref>{{cre53 capsule}} The Basel rules are transliterated into European law under article {{crrprov|194}} of the [[Capital Requirements Regulation]].</ref> they must diligently read and draw reasoned conclusions from these God-forsaken tomes for ''each'' [[counterparty type]], in ''each'' jurisdiction in which they do business, for ''each'' [[master trading agreement]] they trade under, so that their firm’s financial controllers can recognise balance sheet reductions as a result. | |||
[[Netting opinion]]s tend to be long, academic, laden with hypotheticals, appealing to [[Latin]]ate principles of civil law and demanding of unusually skilled powers of comprehension and patience — they are required by regulation to be, in fact — but when it comes down to it, they all say the same thing: that close-out {{tag|netting}} is, ultimately, enforceable: because a [[netting opinion]] would have no reason to exist if it said anything else. | [[Netting opinion]]s tend to be long, academic, laden with hypotheticals, appealing to [[Latin]]ate principles of civil law and demanding of unusually skilled powers of comprehension and patience — they are required by regulation to be, in fact — but when it comes down to it, they all say the same thing: that close-out {{tag|netting}} is, ultimately, enforceable: because a [[netting opinion]] would have no reason to exist if it said anything else. | ||
And so, the netting opinion will say what you know to be true, at gruesome length, clothed in ambiguity and decorated with its own | And so, the netting opinion will say what you know to be true, at gruesome length, clothed in ambiguity and decorated with its own peculiar vocabulary. The following confection, uttered in any other context, would invite a bunch of fives, but it will go unchallenged in a netting opinion: | ||
:“According to legal literature, [[forward contract|forward contracts]] (''marchés a terme'') are [[synallagmatic]] (that is, the parties enter into mutual commitments, each binding itself to the other) and onerous contracts (that is, one party gives or promises something as a [[consideration]] for the commitment of the other party) and contain an [[aleatory]] element (''contrat aléatoire'').”<ref>What this seems to be saying is these | :“According to legal literature, [[forward contract|forward contracts]] (''marchés a terme'') are [[synallagmatic]] (that is, the parties enter into mutual commitments, each binding itself to the other) and onerous contracts (that is, one party gives or promises something as a [[consideration]] for the commitment of the other party) and contain an [[aleatory]] element (''contrat aléatoire'').”<ref>What this seems to be saying is these [[derivative]] [[contract]]s involve binding mutual obligations — in other words, they are {{t|contract}}s — and [[consideration]] — in other words, they are [[contract|contracts]] — and those mutual obligations are referable to unpredictable (“[[aleatory]]”) events beyond the control of the parties — in other words they are ''[[derivative]]'' [[contract]]s.</ref> | ||
Continental lawyers will immediately recognise this terminology. They will tell you it stems from the [[Civil law|Roman tradition]], or some codex developed by a monk while Hannibal’s elephants trekked through the Dolomites, or something like that. | Continental lawyers will immediately recognise this terminology. They will tell you it stems from the [[Civil law|Roman tradition]], or some codex developed by a monk while Hannibal’s elephants trekked through the Dolomites, or something like that. Now we all have our legal folklore, and this is theirs: they learned it during their decades-long internment at the ''Faculté de droit de Paris''. It is their [[Donoghue v Stevenson - Case Note|snail in a gingerbeer]]; their [[Fardell v Potts - Case Note|negligent navigation of a flooded roadway by punt]]; their liability for a [[Ferae naturae|naturally ferocious domestic beast]] which escapes down your mineshaft. | ||
And, make no mistake, across the ditch there is a strain of [[lawyer]] who quietly resents the tidal-wave of [[Common law|Anglo Saxon jurisprudence]] that has deluged the continent for its cross-border business. That the commercial affairs between a Belgian and an Italian should be adjudicated before the courts of England and Wales is a festering point. And he is just the sort to make his living — and thereby extract his revenge on the [[Common law|common law tradition]] — writing [[netting opinion]]s. | |||
And [[Please be aware|be assured]] that this ''ressentiment'' runs ''deep''. For, when even a righteously incensed ''juriste'' must surely have had enough — as you leaf past page 93, hoping for sight of the first annex<ref>Being the dim light in a tunnel containing 17 of the blessed things.</ref> — you will find only a new section detailing specific rules protecting claims under the ''Insurance Sector Act''. You will see this and you will beat your fists on the ground, your voice will crack and you will cry, “WHY ARE YOU EXPOSTULATING ON THE TOPIC OF FIRE AND GENERAL INSURANCE I SIMPLY DO NOT UNDERSTAND IT”. But box on you must, and you know that this ''avocat à la cour'', in his pork-pie hat, will be enjoying a sweet pastry and schnapps with his friend the [[Belgian dentist]], and as they clink glasses they will be thinking of your toil and torment, and they will be ''enjoying every goddamn minute of it''. | |||
===[[Red Flag Act]]=== | ===[[Red Flag Act]]=== | ||
Also, it is a fact, that no [[insolvency administrator]], anywhere in the world, in the history of the world, has ever actually successfully challenged the netting down of offsetting transactions under a derivative trading agreement — or so far as [[I|this commentator]] knows, even tried to — because that would be a patently stupid thing to do, even by accident. | Also, it is a fact, that no [[insolvency administrator]], anywhere in the world, in the history of the world, has ever actually successfully challenged the netting down of offsetting transactions under a derivative trading agreement — or so far as [[I|this commentator]] knows, even tried to — because that would be a patently stupid thing to do, even by accident. | ||
===[[Industry association]]s and [[law firm]]s must do better=== | |||
Given how hateful the process of reviewing and applying netting determinations is, it is a mystery of modern finance and an outright failure of free-market capitalism that the process of obtaining these opinions is as much of a bugger's muddle as it is, but it is. Two constituencies, only, gain from the netting opinion process: those law firms who write them, and the industry bodies which have fashioned an entire cottage industry out of commissioning them. Here, in a piece of contrarian advocacy, are some simple steps one could take to make the process better. This might dent the annual revenues of our learned friends, but it is hard to muster any tears about that. | |||
====Summarise==== | |||
If you are must write a 120-page opinion — and our learned friends would say, “we must: that is what a “written and reasoned” opinion means”, then at the very least, provide a curt summary at the front '''including a table with yes/no recommendations'''. | |||
Now it goes against the grain for lawyers to get to the point, of course — [[bright line test]]s are for the birds — but ultimately their clients must make yes/no decisions, they must do that based on these opinions, and a verbose screed that labours over [[Aleatory contract|aleatory contracts]], and spends [[Extraordinary rendition|pages defining what company is not]], is of very little use to that endeavour. | |||
How is it any more reassuring for the ongoing stability of the financial system that firms spend their time interpreting not the content of their legal agreements, but the content of ''legal opinions about'' their legal agreements? | |||
====Make it machine-readable==== | |||
Providing a 120 opinion — especially one without a summary — as a locked, scanned, tiff image that cannot even be searched for words like “[[aleatory]]” speaks to a humour of the blackest and most wicked kind. We are two decades into the twenty-first century, friends. | |||
====Co-ordinate==== | |||
Bizarrely, giant financial institutions who are past masters at, well, “relentlessly jamming their blood funnels into anything that smells like money”, give the industry associations they fund a free pass. This is so out of character as to make us wonder whether compromising photographs are involved. | |||
You would like to think the [[FIA]], [[ISDA]], [[ICMA]] and [[ISLA]] would fall over themselves to prove their respective worths to their largely common memberships, by coordinating such a profoundly tedious exercise, gathering, summarising and articulating opinions — especially since the bulk of each opinion (the general review of each jurisdiction’s insolvency regime and general application of set off and netting) is common to all of them. (the question “is a single agreement enforceable as a matter of basic contract law?” is not, for most lawyers, an especially difficult one to answer). | |||
But no: not only do these associations jealously prosecute their own netting opinion programmes, asking the same questions about the same jurisdictions and same legal entities, only in subtly different ways, ''they don’t even go to the same firms''. In [[Luxembourg]], [[ICMA]] uses [[Clifford Chance]], the German Banking Association [[Allen & Overy]] and [[ISDA]] uses Allen & Overy for some and Linklaters for the others. Why would anyone be so wasteful? (The stock answer given: competition laws!) | |||
This is wonderful for the worshipful company of [[close-out]] [[netting opinion]] writers, but is hardly value for their clients. Nor do the different entity groups use the same entity categorisations. | |||
So here’s the thing, friends: netting opinions are — to put it bluntly — a paranoid anachronism dating back to the prehistoric time of [[First Men|the First Men]], when swaps were new, apparently comprised of fearful magic, and there was terror as to what they could do. Swaps are now part of the fabric of the [[space-tedium continuum]]. No insolvency administrator has so much as ''tried'' to pull one apart in 40 years, in any jurisdiction, however ropey its grasp of the principles of sound financial governance.<ref>I know what you are thinking: that shows what a prudent process netting compliance is. May I direct you to my favourite elephant joke?</ref> Yet we contrive to let third-party bureaucrats we have appointed waste our time, resources, risk monitoring capacity and most importantly money, without a second glance? | |||
If we have to have these fantabulous regulations, at least be efficient in how we handle them. | |||
=== Whither the banking regulators? === | |||
Now what precedes is a polemic, we confess. Some may scorn it as a cavalier view. “Just because we are paranoid, does not mean no-one is following us,” they will say, and they may well be right. Perhaps we should thank the [[Basel Committee]] for vouchsafing [[close-out netting]] all this time: that we can’t ''see'' [[Elephant|elephants hiding upside down in the custard]] may be down to the quality of their disguise, not their absence. | |||
But okay, then try this: netting opinions are, still, a ''regulator-mandated prudential protection''. Like [[Emission allowances|carbon credits]], they don’t exist in the wild. The [[Basel Committee on Banking Supervision|Basel Committee]] conceived this peculiar regime of “written, reasoned opinions”, then dumped it, unchaperoned, on the market. It took no responsibility: here you are, folks: you work out what this means. | |||
The banks may have had no particular view on the need for, or format of, these opinions, but the legal community did. It went for broke. There is — clearly, joyfully, ''gleefully'' — no end of nuance that those from [[Negotiator|the guild of opinion writers]] can inject into their reasoned analyses. Netting opinions mutated into three-hundred page monsters. The labour of making sense of these tracts falls upon the institutions. | |||
The [[Basel Committee on Banking Supervision|Basel Committee]] cannot see this. It does not care about it. It made this problem — in 1986 — and has not since revisited it. It does not have to deal with it. | |||
So ''make it'' deal with it. | |||
Ask the Committee, itself, to centralise and own the process. Suggest it mandates and commissions the necessary opinions itself, and uses them to decree, annually, for all, with which counterparty types one can obtain netting. This can be issued as a simple matrix of yesses or noes: the institutions can see, but need not concern themselves about, the precise rationale. The playing field is level; opinions are gathered once, and they apply worldwide. There is also transparency here: a central, authoritative source, and an impartial standard to which emerging markets can appeal, and against which they can measure their commercial regulations to put them in fit state for international finance. | |||
Just a thought: it will never happen. | |||
{{sa}} | {{sa}} | ||
*[[Netting manifesto]] | |||
*[[Close-out netting]] | *[[Close-out netting]] | ||
*[[Legal opinion]] | *[[Legal opinion]] | ||
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{{egg}} | {{egg}} | ||
{{ref}} | {{ref}} | ||
<references /> | |||